If anyone out there still doubts the connection between fostering economic incentives for the creation of new works and the health of the economy of that country, please read the 2009 International Property Rights Index, an impressive study conducted by 2008 Hernando de Soto Fellow Anne Chandima Dedigama and sponsored by the Property Rights Alliance. The web site offers a download of the study as well as the 2008 and 2007 studies to allow comparison over time, and is searchable by region and country.

The report looks at three key components to economic growth — the legal and political environment (judicial independence, rule of law, political stability, control of corruption), physical property rights (protection, registering property, access to loans) and intellectual property rights (protection of IP rights, patent protection, copyright piracy). The study is rich in substantive data and involved contributions from 54 organizations on six continents. It ranked 115 countries, representing 96 percent of the world’s GDP. Oh, and while the U.S. is in the top quintile, and ranked tied for second overall in IP rights behind Germany, it did not make the top ten in the other two categories. (Looks like we have some work ahead of us.)

I was fortunate enough to speak on the panel presenting the study today at the National Press Club here in DC. I did not participate in the study but its findings reflect, in a more substantive way, my own research in the field of IP and economic growth. I was asked to speak on the role of IP and the economy. I didn’t have formal prepared remarks but I will summarize my general remarks below.

The three issues that this study highlights — the legal and political environment, real property rights, and intellectual property rights — are of course the underpinnings of Hernando de Soto’s “The Mystery of Capital.” That seminal work has been translated into multiple languages and published around the world. Presumably many of those copies are pirated. My hope would be that the pirates actually read the book and begin to rethink some things.

What these three elements comprise is, of course, the knowledge economy. Another great thinker helped us understand this concept. Back in 1990, a University of Chicago economist named Paul Romer published a paper that illuminated something that seems obvious now but was not back then, namely that economic growth now comes from so-called non-rival goods. In other words, something that can be reproduced with ease. de Soto’s book. A sound recording. A piece of software.

Government, Romer wrote, has an obligation to promote the creation of these nonrival goods. Some non-economists say that since these works can be reproduced infinitely, their value should decline to zero, or the marginal cost of distribution. But Romer recognized that the value of the work is in its creation, and there must be incentives for that.

Romer didn’t say we should lock down the “knowledge” in the “knowledge” economy. Quite the opposite, he argued that knowledge flowed more freely than ever in this new economy. No, he supported protecting the rights to expressions of knowledge, expressions of ideas. This is, of course, what copyright is, and it is expressions of ideas that my members produce each and every day.

The growth de Soto and Romer refer to is evident across the globe, as copyright industries post positive balances of trade. The U.S. Department of Commerce reports that IP makes up more than half of U.S. exports, and 40% of U.S. economic growth.

Economist Stephen Siwek, in a study sponsored by the International Intellectual Property Alliance, found that foreign sales of copyrighted works exceed exports of all other economic sectors. He also found that copyright industries produce a value-added contribution to the total GDP of more than 11%, or more than $1.3 trillion.

And to bring it down home a bit, since we’re talking in our society about jobs right now, George Mason Professor Richard Florida has calculated that the wage and salary income of workers in the creative industries is equal to that of the manufacturing and service sectors combined.

I’d direct your attention now to Page 31 of the Index, to what I think is the most telling indicator of the importance of this study. There are three scattergraphs there, each showing the relationship between the three factors in this study — the legal and political environment, real property rights, and intellectual property rights — and all three have a distinct upward slope. In fact, the text notes that a simple regression found a “statistically significant positive relationship” with high correlation efficiencies overall, and for all three factors studied.

This, I feel, shows the interrelationship of these three categories — I feel you must have stability in your legal and political system and a strong respect for real property rights in order to have a healthy environment for IP rights — but it also shows how closely tied IP rights are with economic growth.

So the knowledge economy is alive and well here in the United States, and in some of the other top quintile countries included in the 2009 Index. But it is notably absent in many more. Just look at Hernando de Soto’s home country of Peru. According to the IIPA figures it just gave to the U.S. Trade Representative as part of the latter’s Special 301 proceeding, software piracy in Peru is at 74%, and recorded music piracy is at 98%.

This isn’t just about making sure U.S. works are respected abroad. Ultimately, this is about giving artists, creators, innovators and entrepreneurs in countries around the world an opportunity to make something of their talents and abilities. This is about their governments fostering their creativity and seeing their economies flourish as a result.

The Index breaks countries down into quintiles, and whenever you do that, by definition, 20% of the countries will be in the bottom quintile. But the spread is so big here — the GDP of the top quintile is 8 times that of the bottom quintile. Our goal should be to see the lowest quintiles close the gap on the upper ones. Let’s get that scattergraph to be high and flat. Let’s make a world where all creative people have an environment that encourages their creativity.

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This entry was posted on Tuesday, February 24th, 2009 at 4:32 pm by Patrick Ross and is filed under creators, economy, events, international, market forces, property rights. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.